Aug 3, 2013

Quit Paying Wall St. Execs, Save More for Yourself!

Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.
(Source: Investopedia)

I know it doesn’t seem like a whole lot.  That 401k statement you received from your old job recently with an expense ratio of 1.5% is a bit higher than the 0.15% you’d have with a low cost index fund, but why bother with all the hassle of doing a rollover?

Or how about your IRA at Edward Jones?  I'm sure that 1.5% expense ratio that comes with your fund invested via Franklin Templeton is well worth it.  I mean, their company has a lot of commercials during golf tournaments, so they have to have big returns.  That's where the golfers invest!

Let me address a few things in this post.

1. It is not a hassle to do a rollover.  In fact, it's incredibly easy and I'll show you how below.
2. The 1.5% expense ratio you pay for your IRA/401k at that other company DOES add up, and it adds up BIG TIME.
3. Just because commercials for Franklin Templeton play during golf tournaments, it doesn't mean the golf pros use that company.  (But you knew that).  : )

How to Do a Rollover

1.  I have not yet had to do a rollover for any of my employer sponsored 401(k)'s because I'm still working at the same company I began my career at after college... (which just so happens to offer a Vanguard 401k, the fund company I'd roll funds over to even if I left)!  I have, however, assisted my Mom with a rollover and it was VERY easy.

Here's what you do:

1. Type into your browser
2. Click on "personal investors" in the bottom left corner
3. Click on "forms" in the upper right corner
4. Click on "roll over a 401(k)" or transfer an IRA if you're electing to move an IRA from elsewhere
5. Follow the instructions, mail in the form.  They'll do the rest.

*Disclaimer: I DON'T have any affiliate links in this post, and personally recommend Vanguard because they KICK ASS at what they do.

That's it!  It is definitely NOT difficult to move your old 401(k) or IRA to a low cost leader like Vanguard.

Do Expense Ratios on Mutual Funds Matter?

 2. Yes expenses REALLY matter when it comes to investing.  In fact, that's the whole reason Vanguard exists!  It's founder, Jack Bogle, decided that the average investor deserved a "fair shake," so he began offering mutual funds at expense ratios so low, they were never before seen.  He knew Wall Street firms preyed on Main Street investors, so he began his company with the sole intention of allowing investors to keep their fair share of returns.

So let's take a look at how a mere 1% reduction in your expense ratio will affect your nest egg over an investing lifetime:

(credit: Bogleheads Wiki)

As you can see, the investor utilizing a 0.5% ER mutual fund to achieve their retirement goals will end up with an extra $220,000 at age 65!  This figure would be closer to $400,000 for the investor using my personal favorite "3 fund portfolio" with average expense ratios averaging around 0.15%.  These types of changes are incredibly simple to make and will add up to massive savings as they compound over time.  Let the compounding work for you, not the investment companies.

What's more, the above chart shows us that investing in Edward Jones favorites like Franklin Templeton, or Oppenheimer Funds with high expense ratios will cause our savings to last only until the age of 80, compared to 90 with the help of low cost index funds.  Wouldn't you like to live with the same amount of dignity if you happened to live until 90 years old!?!

What if My 401(k) Doesn't Offer Low Cost Index Funds?

There's no doubt that investing at least enough to earn the "company match" is the best possible investment return out there. I mean, it's FREE money and nearly all personal finance experts will recommend investing in a 401(k) at least enough to get the full match, regardless of the funds available.

But what do we do if the funds in our company's 401(k) suck?  The Bogleheads recommend we choose the "largest, most diversified funds with the lowest fees."  Let the expense ratios be your guide in choosing the best mutual funds, instead of their past returns.

Hopefully this gives you a new view on your investments and even prompts you to make some changes to keep more of your investing returns.

Pad your pockets, not the pockets of Wall Street executives.

TB, out.


  1. I believing in investing by myself and think that if you need help you should get it. Some people like companies and some don't. When it comes to Vanguard, T. Rowe Price and others you have to find what works for you. I pick my own stocks and have never used Vanguard but have heard great things about their funds. I used T. Rowe Price for several years and had a great experience with them.

  2. This is really a new insight on mutual funds. Even I have heard about Vanguard but never tried for any rollover till now. Maybe in future I may take their assistance if required

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